The conventional wisdom is that it works better to get big with an unsustainable revenue model and convince people you can make it sustainable than to stay small with a sustainable revenue model and convince people you can make it big.
Spend whatever you can to capture the land, then charge rent.
Sometimes it turns out you can't hold the territory. Sometimes it turns out it's not worth much. But the times it works out are the times that make funds.
I'm inclined to agree with you. It's not my field but I suspect VC pressure has something to do with it: they need their 10x returns, or their unicorns, to make up for all the losses elsewhere and "get big fast" is the most reliable mechanism for doing that. Not suggesting I'm a fan of it, btw.
FWIW when I was still a student and not in a 9-5 I wondered what if would feel like to use basecamp. Now here I am happily going with flow using slack on the fre eplan. One of my coworkers sometimes asks if we shouldn't go with a subscription to have the whole logs but we rarely have to dive so far in the past at all.
In technology, it's often the cost of re-integrating with something else. MongoDB makes this lock in ever better because it's API isn't SQL, so getting off is even harder than usual.
I don't really understand your question... this is the favored approach of many Silicon Valley VC firms, and they are widely considered some the smartest tech start-up investors in the world.
If it really is a bad idea, and those firms have been so successful for so long not because of it but in spite of it, then it seems like a huge opportunity for others to come along and displace them with a better model. There's a lot of money in many of these tech markets. But we don't see that happening.
I guess the answer is that it's unintuitive... it seems like an obviously bad idea to many people, but the people that have the most experience think it's a great idea and continue to succeed with it.
There are other approaches: in China, for example, investors generally considered profitability much more important and expect it very rapidly, like in the first 6-18 months (though this has eased quite a bit towards a more SV-style model in recent years).
The gripe then is that companies can't have any long term vision or go big because they have to be making profit immediately and constantly.
Yeah, I when I thought about it I realized when I say "SV VC" I mean probably only the top 10-20 firms or so - the "top tier" or whatever, Sequoia, Accel, KPCB, Benchmark, etc. (highly subjective but you get the idea) - and I think those guys tend to do OK, and it has been mostly the same ones my whole time in tech (~10 years), and I know many go back considerably before that.
I meant that a lot of those people are down with the land-grab now / rent later model.
It's a bad idea most of the time but sometimes it works. The smart investors have a portfolio of many bets, and it's priced in that most won't succeed. For the entrpreneur I think this is a bad idea but for the investors it's workable if they can do it a few dozen times over.
It's just injection of both money and risk, amplifying the result. It'll fail more often than usual. But if it succeeds, wow.
It's a bad idea for the small business owner/startup to pursue, because investors buy into it for the 1 in how-ever-many that get big. 1 facebook is worth many failures. And to be fair, they're not just throwing money at the wall and hoping it sticks - though there is some element of that. There's also the many companies that don't make headlines but are generally - if modestly - successful as well. So, the investors don't want to lose money of course, but they're okay weathering several losses if the occasional win is big enough to more than compensate.
On the flip side, if you're a small business trying to grow your company, this hole "carve out the market operating a loss in hopes that you'll make it big" idea doesn't work in your favor most of the time, statistically speaking.
Modest investment for modest gains for modest success for long term growth is the smarter bet for the business owner (usually), but that's not as flashy, headline worthy, or profitable for the investors as the go-big or go-home approach.
So, it depends on what perspective you're taking as to whether this "conventional wisdom" really is good or bad.
> The conventional wisdom is that it works better to get big with an unsustainable revenue model and convince people you can make it sustainable than to stay small with a sustainable revenue model and convince people you can make it big.
This used to be called fraud, but now calling it out as such is thought of as regressive and anti-entrepreneurial.
I'm sorry if my wording was confusing; the company in these both situations is convincing people (investors) that they can become those things in the future, not that they are at the current time when they're not (which would likely involve some sort of deception).
It's like:
Case 1: "We are spending like mad to capture what we believe is a valuable market as fast as possible. This means we are losing money like crazy right now, but it is working and we are growing fantastically. Once are in a large dominant position, we believe we will be able to retain that market, so we won't have to spend as much on growth, and we can focus our energy on maximizing revenue and being capital efficient and start making a lot of profit."
Case 2: "We have validated our product market fit and business model, and are profitable. Our market share, growth and revenue numbers are small but stable and positive. We believe we will be able to rapidly accelerate our growth and market share in the future while maintaining our margin and start making a lot of profit."
Both are good, neither are fraud, but (1) currently tends to be the favored approach for venture financing, and one way or another it tends to be venture financed companies that end up dominating the important tech markets (though that doesn't necessarily means it's casual).
Last year (through Jan '17) spent (very simplified):
$29.9M on Cost of Revenue (hosting fees + the people who run things + support/consultants)
$78.6M on Sales & Marketing (sales people)
$51.7M on Research & Development (programmers)
$27.1M on General & Administrative (managers/executives/HR)
This was spread across ~820 (as of July) employees. Hosting + Rent + Employees = $188M. Basically they spend $229k per employee which works out to very roughly: ~43% Tech, ~42% Sales, ~15% Management
By comparison, Cloudera is quite similar: 42% on Tech, 45% on Sales, 13% on Management. They made $261M last year and spent $448M, losing -$187M across 1,470 employees ($305k per employee)
A small correction, G&A is everything which cannot be directly tied to per unit of sale. So if they have say employee(s) who work on installing and maintaining an active directory software - used by everyone in the company, those salaries will also be part of G&A.
Mongo going public for same reason all tech companies go public in 2016+ - they are done growing, they are not going to win it all after all, they're fucked, and now the investors want to liquidate
Huh? What is your bar for "done growing". Because the rest of the normal publicly traded market doesn't grow revenue at 50+ percent a year. The average for the S&P 500 is something more like 3-4 percent revenue growth per year.
MongoDB is part of the same thesis as something like Twilio -- they IPO'ed over a year ago with the same belief around differentiating via developer-centric customer acquisition. Twilio is still putting up ~70% yoy growth.
Twilio's growth is exciting but it isn't reflected in their stock price. Every few weeks, I find myself going back to look at their share prices.
Each time, I'm tempted to pull the trigger and invest a moderate five digit sum. I just can't go through with it. I usually buy and hold, long-term investing, and Twilio is one that I've been monitoring since their IPO.
I'd probably pull the trigger if I saw just a bit more fluctuation. It hasn't necessarily got to be just growth, but some fluctuation just to indicate that they are doing something of note.
For 70% yoy growth, it doesn't seem to be really impacting the company's valuation. I'd just checked it earlier this week, and just checked again now, and it's pretty much been the same price for a while now.
Twilio is trading at 10x revenue - which is what an expensive strategic SaaS acquisitions would sell at. The average is 4x[0] - its crazy overpriced even with the growth rate (it's still growing into its valuation)
I think the price was driven up to 20x because many thought it would be acquired.
It also has a ton of short interest in it - so you really shouldn't be investing in it at this point. Do some more research outside of what the price is doing before doing anything (there are undervalued stocks out there)
Yeah, I doubt I'll be investing in them. I can afford to park money in the long-term and take some risks but this one just seems stagnant.
Most of my assets are managed by a financial manager, but I do like to dabble with a smaller fund that I can risk losing entirely. I've actually had pretty good results, considering I'm not really skilled at this.
One of my methods is to simply read comments at sites like HN, Slashdot, Fark, and maybe even Reddit. I look for companies who are getting free publicity and are being reviewed by people who know more about the tech/business than I do.
I then go watch the trading volume and look for fluctuations. I'll read everything I can find about the company, including things like comments from employees at sites where employees anonymously rate their employer.
So far, it has been pretty successful. I made some pretty good money on Yahoo! at one point. I also bought ~$20,000 worth of Tesla when it was priced at $24. I still own those, I've not sold them. There have been a few others and they've done well enough.
I am absolutely not skilled at this. I mostly just buy and hold and plan on selling when it reaches a certain price. I don't have any of it automated, or anything like that. I've never tried to short or do put options. I'm not even entirely sure what the last one is.
It is just me playing around and learning as I go. I never spend anything that I can't afford to lose. I tend to go really slow and do a lot of reading before buying anything.
I've also had some luck with a slightly modified method. When I go to the grocery store, I'll look and see what brands are most frequently in carts and what isn't fully stocked on the shelf. I'll then look up the parent company and make a note of it. If I see that brand continually in shopping carts (I peek, I don't ogle or take pictures) then I'll do more reading and buy some shars in their parent companies. I notice that they seem to have continual but slower growth than the tech companies.
It's more or less just a game. I'd absolutely not take investment advice from me and I'm pretty sure my methods are unsound and probably unorthodox. I am absolutely open to advice, however.
So, with that, I thank you immensely. I'll continue to keep an eye on Twilio but I won't jump in just yet. I may never jump in at all. It's just on my, 'mentioned positively a lot list.'
> One of my methods is to simply read comments at sites like HN, Slashdot, Fark, and maybe even Reddit.
That's a great idea and I've found companies exactly like that (although as private companies - scouting for a VC). We're really in an advantageous position working in tech because we know which companies are doing well and where companies are spending their money.
One disadvantage is that a lot of gains are privatized or with VCs - and some of the best performing companies remain private for longer - but there is still some growth in public markets
I tend to follow the cloud, infosec, social and other tech public companies. I think the SaaS stocks are a bit overvalued at the moment, and there are too many that spend too much on sales and marketing to fuel growth. One of the great benefits of SaaS was that it could infiltrate companies from the bottom up and bypass the S&M process and customer acquisition costs, but there really aren't many of those - and even those companies that did do that, have ended up spending a lot on S&M
I did like Twilio a lot - I liked the Authy acquisition and growing out that way. I'm not sold on the "integration without programming" promise - a lot of companies have tried just that but it hasn't worked. You need dev platforms and developers. I was hoping Twilio would provide a drop-in oauth/openid server for enterprise because the current solutions there suck (serve both internal, intra and external auth backed by LDAP, AD, RDBMS etc.)
Theres a lot of value in their global integrations and routing - but i'm also not sure what the ceiling is for voice + SMS and outside of a handful of countries in emerging markets most messaging is application layer. Being able to push messages via WeChat, FB, WhatsApp etc. would be interesting
But you're right - can't go wrong with long term investments in these markets - either a fund or a basket of stocks you know. The Motley Fool posts are usually good value on getting up to date on some stocks, although there is a lot of people talking up or down their own investments there with what borders on FUD sometimes.
Thanks! It may not seem like it to you, but there's a lot to digest in your post. Before selling my company, I just had a big standard 401k. Now, I have someone who actually manages all that stuff for me.
It is quite a change. I've been retired for ten years, but I'm still getting used to certain things - and there were many things I had no compelling reason to learn.
Which is why I dabble in the market. I've even done some of my own bond selection. I am a sort of partial to bonds because then I can see what project it is that I'm supporting, find out who that project is supporting, and make choices that are both ethical and financially sound (less risky might be a better term).
It has been fascinating to learn some of this stuff. I do visit Mötley Fool sometimes but I mostly only use it as an educational resource. I'm not sure I can put my finger on it, but it just seems a little bit off to me. It's a vague thing, but it seems like they are trying to push me in a certain direction, like they are trying to influence not just what I should buy but the categories I should buy in - and I'm not really sure they have my best interests in mind.
I don't know if that makes any sense, really? It just seems off to me. It's like a feeling that I'm being manipulated. I'm pretty sure I'm not a paranoid schizophrenic or anything, it just isn't where I go for specifics. I happily go there to research and learn.
I still own a whole lot of shares in the now-parent company. I've been pondering unloading some of them and moving them to a more risky position. They are steady growth and I have no complaints but I'd like to put more into the account that I control and that is one way of doing it. Again, nothing that I can't afford to lose.
You've given me a lot to think about and I'm quite grateful. I'm always open to good advice. ;-) I freely admit there are many things I don't know.
> That's a great idea and I've found companies exactly like that (although as private companies - scouting for a VC). We're really in an advantageous position working in tech because we know which companies are doing well and where companies are spending their money.
Interesting! How did you start with such a role - scouting companies for VCs?
> When I go to the grocery store, I'll look and see what brands are most frequently in carts and what isn't fully stocked on the shelf. I'll then look up the parent company and make a note of it. If I see that brand continually in shopping carts (I peek, I don't ogle or take pictures) then I'll do more reading and buy some shars in their parent companies.
To be absolutely clear, I'm not a skilled investor. I'm not a professional. I have absolutely no ability to speak authoritatively on the subject. I don't even know all the terminology involved in the investment industry.
Much more likely is that they've grown to a headcount that would require making quarterly disclosures as a public company would and thus might as well IPO.
I've heard this 6TB number thrown around a bit recently, but no one can actually provide me with links to hardware I can buy - has anyone successfully setup a machine with this much ram who can post links to what they used?
